The main reasons for refinancing mortgages are generally:

Lowering the interest rate and monthly payments on a mortgage
Getting cash out based on the equity in your home
Consolidating debt that may be attracting a higher interest rate, e.g. credit cards
Changing the terms of a loan, e.g. reducing or extending the repayment length

Interest rates vary over time and it can be very frustrating when you are locked in to a high rate, while much lower rates are available to new borrowers. Refinancing onto a new mortgage with lower rates can be a good option provided that the costs associated with the transaction are less than the savings that will be made. You should always check to make sure if there are any fees involved with closing out the existing loan and get a quote for legal costs and fees for the new loan.

“Cash out” refinances are commonly used to fund home remodeling and home improvements and most lenders have special products that are designed specifically for this reason. You may find that lenders are prepared to give a better than advertised interest rate because the funds released will be used to increase the value of the property, thereby increasing the lender’s security.

Provided you have sufficient equity in your property, many lenders will allow you to take cash out for non-home improvement purposes. The standard rule is the total new loan must not exceed 75 – 80% of the value of the property. As many Americans have discovered, home ownership is not a free piggy bank, and property values can decline significantly, so caution should be exercised in using equity unnecessarily.

Consolidating other debt by refinancing allows you to access the equity in your home and get cash at closing to repay the other loans. The existing home mortgage and any loans or liens secured on the property are paid off and replaced with the new mortgage. Many people use “cash out” mortgages to pay off unsecured loans, auto loans, student loans, or credit cards. The lender may require that outstanding debt be paid off as part of the transaction.

Sometimes a borrower simply wants to change the terms of a mortgage and refinancing to another lender can be an attractive option. The new lender may offer incentives that reduce of cover the costs of refinancing while offering terms that the previous mortgage did not have, for example a no charge early repayment option, a fixed rate guarantee or a 15 year term instead of 25 years.

Whatever your reasons for refinancing make sure that you actually get what your lender promised you by checking the first page of your Good Faith Estimate (GFE) to ensure that all of the information is accurate and that your offer is locked in. Once you accept the terms of the GFE, your lender cannot make any changes but there is a mandatory 72-hour waiting period between the time a GFE is issued and a closing.

Refinancing when your home is worth less than your mortgage

Seeing the value of your property decline below the amount that you owe on it can be one of the most frustrating aspects of home ownership, but if this is the case you should not give up hope because the government’s Making Home Affordable program, may offer a solution.

If you meet specific criteria, your loan may be eligible for refinance through the federal Home Affordable Refinance Program (HARP). This allows qualified borrowers to refinance a loan that represents 105 – 125% of a home’s value. Given that standard commercial refinancing options for underwater mortgages are virtually impossible to obtain because most lenders require 20% equity in the property, this can be a valuable lifeline.

Not every loan qualifies for HARP and the rules are not negotiable:

First, you must not be on the path to foreclosure, if you have had any delinquent payments in the past 12 months you will not eligible, because the program is designed to support borrowers who have demonstrated a commitment and ability to cover their loan obligations
Second the loan must be owned by Fannie Mae or Freddie Mac.
Thirdly, the loan to value ratio may not exceed 125% of the value of the property.

In addition to the 3 eligibility rules every application is assessed based on the individual applicant’s payment history and other factors including credit score, the structure of the current home financing and specific lender guidelines.

For people who do not qualify for HARP, there may be an alternative way forward via the federal Home Affordable Modification Program (HAMP) which is available through selected mortgage lenders. This program is designed to help those that have an underwater mortgage and who have also missed payments.

To qualify for HAMP, you must demonstrate financial hardship and show that your mortgage is in danger of default. Your mortgage must be owned by Fannie Mae, Freddie Mac or by a lender that has contracted with the U.S. Treasury for HAMP status. The home must be your primary residence, the mortgage must be less than $729,750 and the current monthly payment must be more than 31% of your gross monthly income.

HAMP is not strictly a refinancing program, it is actually a modification to the existing mortgage terms designed to lower your monthly payments for 5 years. From year 6 onwards the rate increases by 1% annually until it reaches the market rate that was in place at the time the loan was adjusted. The program offers incentives to registered lenders to encourage them to participate, however the approval process rests with the lender not with the government.

If neither HARP nor HAMP are possible you may be able to negotiate a short sale, where you sell your house at market value, with the remaining loan balance forgiven by the lender. This has less negative impact on your credit history than foreclosure and lenders are increasingly willing to co-operate.